Bank of England accused of wrecking post-Brexit freedom reforms

The Bank of England has been accused by a Cabinet minister of blocking a wave of post-Brexit reforms amid a growing row between regulators and the Government.

Sources close to a member of the Cabinet said that Threadneedle Street is "100pc" resisting cuts to red tape in the wake of Britain's departure form the European Union following a clash over the insurance market.

Insiders said they are particularly concerned about the approach taken by the Prudential Regulation Authority (PRA), part of the Bank set up to police the financial system following the 2008 crisis.

They warned that the PRA's slow response to demands for an overhaul of EU-era insurance rules known as Solvency 2 is symptomatic of a wider institutional reluctance to embrace Brexit freedoms. 

The source added: “The PRA is in danger of making a mess of some amazingly important reforms.”

The clash - which would once have been highly unusual - follows months of rising tensions between the Government and Andrew Bailey, the Bank of England Governor, over who is to blame for the cost of living crisis as inflation spirals out of control.

The latest flashpoint comes over plans to relax the controversial Solvency 2 rulebook, which was introduced by the EU in 2016 and requires UK insurers to hold vast sums of cash on their balance sheets.

Insurance has been touted for years as an industry that could benefit from relaxing EU rules and industry chiefs have pledged to unleash a £90bn-plus investment “Big Bang” if ministers take advantage of Brexit and slash the EU-era red tape

Insurers and pension funds have argued that the current restrictions mean they are unable to plough as much capital as they want into illiquid assets like infrastructure.

However, there are growing concerns in Government that regulators are holding up the reforms. Boris Johnson, the prime minister, is said to be increasingly impatient with the PRA who he thinks is being excessively cautious.

The regulator, which supervises Britain’s insurers, has said it is determined to ensure any easing of the regulatory burden does not create a risk to policyholders or to the stability of companies.

It previously sounded a more cautious note on reforms to the rulebook, warning against an overhaul that “materially decapitalises the insurance sector”.

A source close to the Cabinet minister said: “Ministers seem to be most frustrated with the PRA specifically rather than the Bank of England generally at the moment.”

The proposed reforms are expected to reduce the reporting and administration burden on businesses, increase their flexibility to invest in long-term assets including infrastructure, and free up funds by reducing the risk margin insurers face.

At the same time the “matching adjustment” mechanism covering long-term investments, which the industry says pushes it away from projects such as wind farms and into low-yielding sovereign and corporate bonds, will also be tweaked.

There have also been growing concerns among insurance chiefs about how the overhaul is developing, with some arguing that the PRA is looking to water down charges to the “matching adjustment” which could make large parts of the reforms redundant.

Insurance executives met with Rishi Sunak, the Chancellor, on Monday to discuss Solvency 2 reforms and some industry chiefs raised questions about the PRA’s proposals around the matching adjustment, The Telegraph understands.

Mr Johnson’s concerns, which were first reported by the Financial Times, came as the EU overhauls its own solvency regime, sparking fears in the City and in Whitehall that the UK was moving too slowly to overhaul the rulebook and risked being eclipsed by Brussels.

Jacob Rees-Mogg, the Brexit opportunities minister, has said that Solvency 2 rules were “ripe for reform” and should be rapidly rewritten.

Earlier this year, Amanda Blanc, chief executive of Aviva, also told the Telegraph that it was time to reform the EU rulebook and “put our country’s hard earned pensions funds to positive national use”.

In December,Mr Bailey said that “the case for reform is clear”, and added that Solvency 2 was “never well suited” to the UK market, claiming they threaten the financial soundness of insurers and the protection of policyholders.

A spokesman for the Treasury said: “We want to support our vibrant insurance sector to invest in this country, while continuing to ensure protection of policyholders.

“We’re working closely with the regulators and the industry to redesign the rules so they best suit our country’s needs.”

“Now we’ve left the EU, we are determined to ensure the rules around the insurance sector work in the best interests of the UK.”

A spokesman for the Bank said: “The Bank of England has got on with implementing Brexit. Our proposed reforms to Solvency II are more wide-ranging and support all of the objectives set out by the Government.”